Serrano

The BIG caveat is that we are talking about the 'New State Pension' - which means men born on or after 06/04/1951 and women born on or after 06/04/1953. This is likely to be the case for most people asking about pensions, as (almost) everyone born before those dates will be already in receipt of their pension.

OK, first how the figures work out. In principle each year of contributions 'buys' you 1/35 of the full pension. The current rate is £159.55 per week, so 1/35 gives you just under £4.56 per week. Times 52.18 weeks gives £237.87 per year. Divide this into the £733.20 of capital you have used to 'buy' it gives 32.4% return per year, so you 'get your money back' in just over 3 years, after that you are quids in.

As for the years of contributions, the whole thing is a bit wierd. I can't decide whether it is sensible policy or not. As far as I can tell the rationale seems to be as follows: "While you were contracted out you paid lower than normal NI contribs, the difference being paid into a private pension, from which you will now benefit. To put you on an equal footing with people who weren't contracted-out, your pension will be reduced by a reasonable rate of return on your private pension - this is the COPE (Contracted Out pension Equivalent) which is shown in your forecast"

OK, so far, so good, but now comes the wierdness. Because your new, reduced pension falls short of the standard "New State Pension" you are then allowed to 'buy' extra years of Pension using the formula given earlier (I believe with no limit to the number of years). In my wife's case her COPE is £19.91 per week, so she wants to buy an additional 4 qualifying years to add another £18.24 per week (the previously-mentioned return of 32.4%). She could buy a fifth year, but her pension would then be capped at the 'New State Pension' level, an increase of only £1.67 per week, annual yield of 11.9%. It's probably just worth-while, but she probably won't be going for it. Buying a sixth year would be possible but the pension wouldn't go up at all, so she ain't going to do that!!!

Where did I get the info from? The Pensions Service (with great difficulty, most of them don't understand how the system works, they can just produce figures for you).

If your COPE is very high, it may be worth your while paying 6 years' back contributions now and then continuing to pay each year until you reach Statutory Retirement Age (and who knows, you may be able to keep buying after that, even while you're drawing a pension!) until you have the maximum 'New State Pension'

Again, HTH

Serrano

OK, so you are under the new regime. Your currently accrued pension is £45.58 (10 years' contributions), and if you pay a further 13 years you will get £104.84 (13x almost £4.56 + £45.58)

Is it worth it? To quote Clint Eastwood "‘You've got to ask yourself one question. Do I feel lucky?" Except the other way round - the statistics are in your favour, so it may be better to say "Do I feel unlucky?" - or unhealthy?

All figures here at today's rates. 13 years will cost you £9531.60. If you die between now and age 67 you will lose what you have paid in. At that point you'll get back an extra £59.26 every week until you die. After 161 weeks (3 years 1 month, give or take) you'll have got back all your money, and will continue to receive your extra every week. With average life expectancy at about 84, that'll be another 14 years, or about £43000 'profit'. OK, life expectancy calculations aren't anything like that easy (this why actuaries are quite well paid) but the upside - all other things being equal - looks much, much better than the downside.

THIS IS NOT FINANCIAL ADVICE - IT'S YOUR LIFE, NOT MINE.

philat98

I have 37 years of NI contributions that will give me a pension of 152pounds a week in 2024. The DWP estimate my COPE deduction at 54 pounds per week. Are you saying that I can still increase my state pension even though I have paid more than 35 years of contributions? I listened to a Money programme on Radio 4 that implied that you could contribute beyond 35 years.

Geordieborn

Phil is the word "not" missing from this?

philat98

I was rather hoping the answer was yes. I don't have great expectations for those private pension contributions.

Geordieborn

Okay, I've only looked at the gov.uk site for my information on this to add to my knowledge the numerous changes these people have made since I was employed developing their horrid systems. From what I now know I think this moneysavingexpert site gives the most accurrate picture of how I see it at the moment. I say at the moment as I had missed this morning the link to this COPE, so thank Serrano for that. Important bits as I see it regards others here are that it appears to be saying at most you can only buy missing years up to a max of 10, for some this is only 6. That's not to say you can't buy for future years. There is a limit on the number of qualifying years (QY), but I've not spotted the official line on this yet. Only glossed some of the link page, so they may have it hidden somewhere there.
Possibly imprtant to G. is the fact you cannot get child care credits (prev HRP - home responsibility Protection prior to 2010) if you were working at the time i.e. selfemployed?

Serrano

It is a bit complicated. I presume in what follows here that you already have 37 years of NI contributions. Careful here because the headline figure on the forecast often assumes that you will continue to pay further contributions up until Standard Retirement Age, which for you will probably be 66. If this is the case, about 5 lines after the headline figure you'll find "You need to continue to contribute National Insurance to reach your forecast"

The 'New State Pension' is calculated as "the higher of either (1) the amount you would get under the old State Pension rules (which includes basic State Pension and Additional State Pension) OR (b) the amount you would get if the new State Pension had been in place at the start of your working life".

In your case you are presumably covered in scenario (1) above, i.e. having substantial Additional State Pension rights. Since your COPE now takes you slightly below the standard 'New Pension' amount, you should be able to buy additional years - even above the 35 (as an example my long-suffering wife has already 34 qualifying years, but has nonetheless been offered the option of buying another 5).

You can't buy a pension greater than the normal 'New State Pension', currently £159.55 per week, so in your case you can only buy another £6.50 - £7.50 or so a week (depending on whether your £152 means £152.00 or £152.99). So buying one year would net you £4.56 per week, buying a second would get a further £2-£3 or so taking you up to the maximum.

Geordieborn

I believe it could be "yes" Phil and you have until 2023 to do so according the the link just posted. They do not give enough detail to give an unqualified "yes" as they say "if eligible", but this offical gov.uk site provides that detail.
It's interesting the moneysavings site is not quite as upbeat about it being such a good idea, but it does look like I have quite a bit time yet to decide

Serrano

A good site with a good primer on the New State Pension, thanks for linking to it. However, that site is looking at the 'normal' case, whereas we are mostly ex-pats, thus anything but 'normal'

So where the site, talking about buying extra years, says "The key that defines whether it's worth bothering is how many NI years you already have. HMRC should send notices to people with NI gaps" it is fair comment for a UK resident who is in work (or otherwise getting NI contribution credits). But if that is not the case, i.e. for most people here, you should seriously consider continuing to contribute while it continues to maximise your pension - and even buy additional past years if necessary.

giuliana

Thanks Serrano, it's all clear now, a bit like playing poker!!! What about hubby, he has 8 years so will get nothing, if he pays 2 years I guess he will get the 45.00 if he pays 6 years he will get around 62.00, does that sound right?

Serrano

Mmmm, at first sight it seems unfair that he should get nothing as things stand, after all under the old system he would have been entitled to something, whereas under the new, nothing. But I can see where they are coming from, introducing the new 10 year minimum rule. Unfortunately, legislation almost never works perfectly for everyone, and in this case your husband is one of a minority that are likely to lose out because of the change.

My interpretation is that yes, if he continues to pay another 2 years then he will get 10/35 of the New State Pension, i.e. £45.58 per week. If he is not unlucky this is a no-brainer because he will have invested just less than £1500 and will get back well over £2000 every year when he retires (in 5 or 6 years' time). So he would 'get his money back' in just 33 weeks of pension, after which he would be 'in profit' (using the same basis for calculation that gave the 32.4% return for most people, his annual return would be 162% - because he is in effect buying 2 years contributions to get 10 years worth of pension, if you understand what I mean). After this each additional year he buys would cost £733.20 and return £4.56 per week (the now-famous 32.4% return), so another 4 years contribs would give him about £63.82 a week total.

It would be worth him asking if he can pay contributions for any of the last 6 years that are 'missing', as in the best possible scenario he could then end up with 20 years' contribs giving £91 odd a week pension.

Obviously the advisability or otherwise is for you to decide, depending on your financial circumstances (we are talking of investing £15K to £20K), state of health and approach to risk. Also, the further away from pension age anyone is, the more risk of the Government changing the rules (yet) again.

Don't forget in all this that the pension is taxable, so the 32.4% annual return quoted is likely to reduce to 25% (or less, depending on your tax bracket). But still not bad.

giuliana

They didn't mention on the pension forecast anything about previous years as they did in mine, they just said if he pays another 6 years the best he can get is 62 quid something. At this point I think we should pay at least the 2 years to get 45 quid and if we can the other 4. In the UK you can earn about 10 k before tax is taken off, can't you?
As far as I am concerned I think I will wait until I am 60 just to see if the situation changes ( I don't die!) and then pay 6 years arrears and 7 future ones, does this sound like a plan Serrano?

Geordieborn

The earlier you pay, less return you get Giuliana and on that subject, you do not get anything like 32.4% or even the now reduced 25% Serrano mentions. In the example of paying 13 years, if you pay now it is 17 years before you get your first full years return, that gives a return (ignoring tax) of less than 2% per year. Big plus at the moment is it has a triple lock, but that may change as anything can in pensions.. You need to look at the official government site here for information on paying arrears and what you can pay. Your OH can wait until just before his pension is due if he wants. I can understand if he does not want to involve the Italian side, but 2 yrs there would mean he pays nothing, although Brexit is a slight risk. I'm guessing you have sorted your own record any are satisfied everything is there?

Serrano

No, sorry Geordieborn, I can't agree with you, or more accurately your way of looking at it. In general, investing money you are lucky to match inflation (after tax is taken into account). So by my reckoning if she invested the £733.20 each year, she'd make nothing. As such I have started the clock ticking (an unfortunate expression in this Brexit era ) when she starts taking her pension.

The bigger problem, however, is the way you are calculating it assumes that the OP will die after getting her pension for only 1 year. Even then, only the first year will be paid for 12 years in advance, the second 11 years in advance, etc. So the average is 6 years in advance. Then, yes, the return would only be about 4% OVERALL - but even that isn't too bad (how many cash investments do you have that return anywhere like 4% gross?). However if she lives for 2 years after starting her pension, the return is about 7.5% OVERALL. 3 years higher yet, until eventually maxing out at about 32%

And assuming death at 84 (about the average) she'll be getting 18 years of almost £60 per week - a total of about £55K. Spread that across the 18 + (12/2) = 24 years and you get an average return over the whole period of 24% gross. If she lived to 100 - far from impossible these days - it would be 34 years of benefits 'spread' over 40 years, return - guess what, 32.4%. Of course, she may die tomorrow or (worst of all) the day before she starts drawing her pension. But as I said before the upsides, as I see it, are far more positive than the downsides are negative.

Geordieborn

Glad to see you are down to 4% per year now, keep going